One of the key lessons from Philip Lowe’s period as Reserve Bank governor was to be careful that your messaging doesn’t create expectations you can’t or won’t want to meet. Whether newish governor Michele Bullock learnt that lesson as deputy to Lowe isn’t at all clear.
Four times this month she has emphasised the policy primacy of the central bank’s role of controlling prices by putting up interest rates if it feels inflation was proving to be tough to reduce. Not employment. Not financial stability. Inflation.
Less than a day before the release at 11.30am yesterday of the consumer price index (CPI) for the September quarter and the CPI’s monthly indicator for September, Bullock explained that the bank had a “low tolerance” for inflation moving too slowly back to the RBA’s target band.
She’d also used the phrase in the minutes of the October 3 board meeting, released last week. And in a bizarrely named “fireside chat” (“governor, you are no president Roosevelt”) a week ago at a finance conference, Bullock also talked about how “sticky” inflation was, as part of an extended discussion that mentioned inflation more than 40 times and jobs, well, not at all, except to comment that we still had a tight labour market.
In the actual statement from the October 3 decision to hold rates, Bullock emphasised that inflation was still too high and that if it didn’t seem to be coming down fast enough, the RBA would raise rates.
Bullock has thus cast herself as an inflation hawk — which is music to the ears of the inflation vultures and pet shop galahs of the financial markets and The Australian Financial Review who are desperate to see interest rates and unemployment rise and workers impoverished with (yet more) real wage falls.
“Low tolerance” is an unusual phrase for a central banker. It’s always been assumed that the RBA (like all central banks) has always had a “low tolerance” for inflation. What’s that line in Oliver Stone’s Nixon? “Presidents don’t threaten. They don’t have to.” It’s taken as read that central bankers don’t have to explain that they have a low tolerance for inflation.
But in stating the obvious, in making a point of noting the unnecessary, in labouring the point, Bullock has painted herself into a corner: the yardstick for measuring the central bank’s performance must now be inflation. Anything other than a rapid return to 2-3% will reflect a too-large tolerance of inflation. Jobs, stability, prudential risk come second.
But despite the obsession of the business class and the commentariat with “sticky” inflation, a wage-price spiral and inflationary expectations, inflation at the moment is still being driven by supply-side problems and profiteering — something the RBA and its big business-dominated board appears to have a very great tolerance for indeed, to the extent of sticking its collective hands over its ears and yelling “Not listening! Not listening!” to the extensive evidence.
So after yesterday’s slightly higher-than-expected September quarter inflation data, the galahs and the vultures now expect an interest rate rise at the November meeting. According to market pundits, it’s odds-on that rates will rise. Why?
According to the Australian Bureau of Statistics, the CPI for the September quarter rose by 1.2% instead of the 1.1% rise expected by most economists. That saw the annual rate fall to 5.4% from 6% in the June quarter to be the lowest annual rate in 18 months. The closely watched measure of underlying inflation, the trimmed mean, increased by 1.2% in the quarter in the CPI, although the annual rate fell to 5.2%.
The culprits were higher petrol costs, higher electricity costs and higher rents.
Higher petrol costs are outside the control of anyone in Australia, especially while our politicians, with a few notable exceptions like Matt Kean, drag their feet on uptake of electric vehicles. As for rents, the RBA itself has done its bit there with rate rises, exacerbating generations of government inaction on new home building and affordable housing.
Higher electricity costs are the product of a decade of Coalition ineptitude and an anti-competitive energy market, but they were lower than otherwise because of government intervention — and increased rent subsidies also reduced the impact of rent rises. In childcare, prices actually fell because of government policies.
The line from the vultures and the galahs is that government intervention to reduce inflation is a big no-no, that it will just distort markets and reduce investment by reducing profits. Turns out, government intervention had a real impact in reducing inflation, and could have had even more if the Albanese government was more aggressive about enforcing competition and tightly regulating the monopolies, duopolies and oligopolies that dominate our major markets.
Maybe Bullock should be calling for more of that rather than pandering to the “rate rise looms” crowd and locking herself into rate rises that will do nothing but punish Australians.
